Growth without risk?

Build on your CCRC continuum with active adult housing 

HOW WOULD YOU LIKE TO ENHANCE YOUR MARKET RESPONSIVENESS, increase your average length of stay, optimize your resident profile, improve your operating profit margin, and possibly put another $300,000 to $500,000 in your coffers? Better still, how would you like to accomplish this with limited capital and with acceptable market and financial risk?

If the answer is yes and you have land available on your campus, consider adding active adult housing. The active adult product frequently consists of single-family homes with living areas of approximately 1,500-1,800 square feet with garages. The resulting unit density is 7-10 units per acre. A higher-density alternative would be attached duplexes, triplexes, and quadruplexes with living areas ranging from 1,200-1,600 square feet yielding a density of 6-8 units per acre.

For example, adding 25 active adult villas with a reasonable land cost allocation of $20,000 per unit allows you to realize another $500,000 of existing land value that is probably already owned free and clear. You might take the land cost allocation as a cash bonus from your project financing or contribute it as your plan's equity component.

You should also realize annual increases in cash flow after all operating expenses and mortgage payments are paid. This will likely range from $4,000 to $5,000 per unit per year or a total of approximately $120,000 per year.

You will have some unique market positioning issues to address. Your current resident profile probably involves 70 percent to 80 percent single or widowed women with an average entry age of at least 80 years. Most of these residents have probably experienced a life circumstance that motivated them to make the senior living decision. The villa residents will typically be couples, primarily 65 to 80 years of age, who experience a moderately active lifestyle and are in relatively good health. Their primary motivation to move will be to experience hassle-free living with optional access to future services such as meals and housekeeping. These active adult residents will also move throughout the public spaces located within your central CCRC commons building.

When developing a new campus, your market positioning must be focused sharply to avoid confusion and cannibalization between your villas and congregate independent living apartments. Each must be positioned as separate products for seniors who have different short-term wants and needs, but common long-term concerns.

Your next challenge is to select a market-responsive, financially viable pricing strategy. There are many options, but a common approach is to charge a one-time, upfront fee to cover the bricks-and-mortar cost and a monthly fee for services rendered. Typically there are three types of upfront fees: conventional purchase involving fee simple ownership, cooperative or condominium owners paying a one-time fee similar to the conventional home purchase, and the life estate or master trust concept requiring the resident to pay an upfront fee in an amount similar to fee simple purchase. However, the resident does not technically own her unit, but has a "lifetime right" (non-transferable) to live in the unit.

A fixed monthly service fee unique to each unit type and size is usually assessed based on full cost recovery for certain core services, much like a townhouse or condominium fee. These services are composed of the normal costs of providing hassle-free living that seniors desire including maintenance.

The risk of selling the units can be hedged by designing a master plan with multiple phases. One approach is to pre-sell 7-10 units at a time, with the senior consumer selecting a specific home site, floor plan, and building elevation. When approximately 80 percent of a particular "development phase" has been pre-sold (10 percent deposits received, etc.), a release for construction of those units would be initiated.

If you charge an upfront fee, you should establish a tiered progress payment policy. A series of progress payments might include 10 percent upon signing sales contract, 20 percent at groundbreaking, 40 percent at finish-out, and 30 percent upon move-in. This process allows you to cover most of your cash needs.

Active adult housing just may be the optimum strategy to complete your continuum and optimize your CCRC.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based national senior housing and health care consulting firm. He is author of Assisted Living 2000 and, most recently, Assisted Living Strategies for Changing Markets.